Key takeaways
- The Personal Savings Allowance lets basic rate taxpayers earn £1,000 of interest tax-free, higher rate taxpayers £500 and additional rate taxpayers nothing.
- The starting rate for savings gives up to £5,000 of interest at 0% for people whose other income is low.
- Interest above the allowances is taxed at 20%, 40% or 45% in 2026/27, rising to 22%, 42% and 47% from April 2027.
- Interest in an ISA is tax-free and does not count towards any allowance.
- Banks pay interest gross and report it to HMRC, which usually collects any tax through your tax code.
Higher interest rates since 2022 have pulled many savers into paying tax on their interest for the first time, because the allowances have not moved since 2016. Most people still pay nothing, but anyone with a large cash balance outside an ISA, or a higher income, should check where they stand.
Allowances for savings interest in 2026/27
Three allowances can apply, in this order:
| Allowance | Amount | Who gets it |
|---|---|---|
| Personal Allowance | £12,570 | Anyone; if unused by other income it covers interest too |
| Starting rate for savings | Up to £5,000 at 0% | People whose non-savings income is below £17,570 |
| Personal Savings Allowance (PSA) | £1,000 basic rate, £500 higher rate, £0 additional rate | Everyone except additional rate taxpayers |
The starting rate for savings
The starting rate band is £5,000. It is reduced by £1 for every £1 of non-savings income (earnings, pensions, rental and trading profits) above your Personal Allowance. So:
- non-savings income of £12,570 or less: full £5,000 starting rate band
- non-savings income of £15,000: band reduced by £2,430 to £2,570
- non-savings income of £17,570 or more: no starting rate band
This means someone with non-savings income at or below their Personal Allowance can receive up to £18,570 of interest tax-free in 2026/27: £12,570 of unused allowance plus £5,000 starting rate plus a £1,000 PSA if their total income keeps them a basic rate taxpayer.
The Personal Savings Allowance
Your PSA depends on your income tax band, worked out using your total taxable income including the interest:
- basic rate taxpayer (total taxable income up to £50,270): £1,000
- higher rate taxpayer (up to £125,140): £500
- additional rate taxpayer: nothing
Interest covered by the PSA is taxed at 0% but still counts as income, so it can push other income into a higher band.
Rates on taxable interest
| Band | 2026/27 | From 6 April 2027 |
|---|---|---|
| Savings basic rate | 20% | 22% |
| Savings higher rate | 40% | 42% |
| Savings additional rate | 45% | 47% |
The increase from April 2027 was announced in the Autumn Budget 2025, alongside new property income rates of 22%, 42% and 47%.
Worked examples
Basic rate taxpayer
Priya earns £35,000 and receives £1,600 of interest. Her non-savings income is above £17,570, so there is no starting rate band. Her PSA is £1,000. She pays 20% on £600: £120.
Higher rate taxpayer
Tom earns £60,000 and receives £2,000 of interest. His PSA is £500. He pays 40% on £1,500: £600.
Retired saver
Margaret has a pension of £13,000 and receives £6,000 of interest. Her pension uses her £12,570 Personal Allowance and £430 of her starting rate band, leaving £4,570 at 0%. The PSA covers the next £1,000. She pays 20% on the remaining £430: £86.
What counts as savings income
- interest from bank and building society accounts, including easy access, notice and fixed rate accounts
- interest from credit unions and National Savings and Investments products, except tax-free ones such as Premium Bond prizes
- interest distributions from bond funds and corporate bonds
- interest from peer-to-peer lending (losses may be offset in some cases)
- purchased life annuity income (the interest element)
Interest is taxable in the tax year it is paid or credited to you, not when it is earned. A fixed rate bond that pays all its interest at maturity can therefore create a large one-off amount in a single year.
How the tax is collected
Banks and building societies pay interest without deducting tax and report it to HMRC. HMRC then:
- adjusts your tax code to collect the tax if you are employed or receive a pension, usually based on the previous year’s interest, or
- sends a simple assessment (a P800 or PA302) asking you to pay, or
- includes it in your Self Assessment return if you file one; you must file if your untaxed savings and investment income is over £10,000
Check your tax code each year if your interest changes significantly, so the right amount is collected.
Ways to reduce tax on savings
- Use ISAs. Interest in a cash ISA is tax-free. The overall ISA allowance is £20,000 a year; from 6 April 2027 the cash ISA limit falls to £12,000 for people under 65. See ISA tax benefits.
- Share savings with a spouse or civil partner. Moving savings to a partner with an unused PSA or starting rate band can cut the tax, provided it is a genuine gift.
- Consider Premium Bonds, whose prizes are tax-free.
- Time fixed-term interest so it does not all land in one tax year.
Frequently asked questions
How much interest can I earn before paying tax?
A basic rate taxpayer can earn £1,000 a year and a higher rate taxpayer £500 under the Personal Savings Allowance. If your other income is low, the starting rate for savings can add up to £5,000 more.
Do I need to tell HMRC about my savings interest?
Usually not, because banks report it. You must use Self Assessment if your untaxed savings and investment income is over £10,000, or if you already file a return.
Is ISA interest included in my Personal Savings Allowance?
No. ISA interest is tax-free and ignored completely.
Will tax on savings go up?
Yes. From 6 April 2027 the rates on savings income rise to 22%, 42% and 47%. The allowances are not changing.
What is the starting rate for savings?
A band of up to £5,000 of interest taxed at 0%, available in full if your non-savings income is £12,570 or less and reduced pound for pound above that.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.